The Exchanges

Q How about some aspects of what became known as the L model?

A To me, the Yale motto was really about maintaining this equity orientation in the portfolio, but then also diversifying into asset classes, which at the time were alternative and were inefficient enough that if you really selected the best managers, they could outperform. And then the third piece of it was really focusing on talent and trying to find the best managers around the globe. This model really still holds true today, although I remember seeing some analysis that suggested that half of the value that Yale had added over time relative to peer endowments was from asset allocation and half was manager selection. And my guess is if you fast forward, there's gonna be more of that from manager selection over time because so many people have just copied this asset allocation model.

AI assessment note: “maintaining this equity orientation in the portfolio, but then also diversifying into asset classes”

Q What was the Packard Foundation like when you got there?

A There were five line items in the portfolio, a few index funds, and a lot of HP stock. The foundation didn't have an investments team until the very end of 2007, early 2008 when I joined. So it was a startup investments team. Historically, the foundation had held Hewlett Packard stock, eventually post the compact merger ended up gradually selling out of HP, but still had a large amount of it and diversifying into index Well, they tried to figure out how to hire an investments team and start an investments function. It was really a blank slate. There were two people on the investments team when I joined John mailing the first CIO and his assistant Lena and me. So it was blank slate start from scratch.

AI assessment note: “There were five line items in the portfolio, a few index funds, and a lot”

Q On the strategy side, let's talk about inefficient markets, right? It's a great phrase. Think about it. How would you define, as you look at your portfolio, where you think managers are participating in so-called inefficient markets?

A I think two areas where we have a lot of exposure in the portfolio are emerging markets and then smaller private equity funds, two areas that I think tend to be pretty inefficient. For better or for worse, we've had 40 to 50% of our public equity portfolio in EM over time, which, as we all know, from a beta perspective, that has not been a good bet. I mean, we kind of have just gone through this lost decade. But both on a 10 and a 15 year basis, our emerging market public equity has outperformed our developed market. So there's real alpha there. And we think we have been able to partner with managers who can find it. And so I think it's a really appealing asset class. And if we get the beta on top of the alpha in the future, that won't be a really good thing. Small buyouts is another example. Since the GFC, large buyouts have done really well, surprisingly well. So maybe you can look back and say that wasn't the greatest move. Some very large number of private companies in the United States are small companies. If you look at the opportunity set relative to the amount of capital that's raised for that opportunity set, there's a real mismatch there. And there tend to be fewer sophisticated intermediaries. There's more value on the buy. I mean, the valuations do tend to be lower, um, for smaller companies. There's often less debt on small buyouts. And then most importantly, the T…

AI assessment note: “two areas where we have a lot of exposure in the portfolio are emerging markets and then smaller private equity funds”

Q What are the aspects that made it different?

A The first thing I would say is liquidity management for a foundation is a really different exercise. So if you think of university endowments, a lot of them, especially the prominent ones, have money coming in the door from alumni that either partially or nearly fully covers their payout to the university. So there's not a big net liability there. You can take a lot more illiquidity. With a foundation, you've got five to six percent coming out each year. There's no money coming in the door. So your portfolio needs to both cover that payout, but also the internal plumbing of your capital calls and everything like that. That may not sound like a big deal, but if you think about the math, if you start with a hundred million dollar endowment and you lose 10% and you're a university endowment, and let's just say for the sake of argument that you have no net outflows. And so the market's down 10%, you lose 10%. The next year you gain 10%. You're back at 99. So with the foundation, you lose 10%, you spend five, you're at 85, then you gain 10%, and you spend five again, and you're in the eighties. You've lost 11, 12% of your endowment over the course of two years, and the market hasn't even moved that much. So you have this massive denominator effect that can occur in the foundation portfolio, which is why you see a lot of foundations holding 10, 15% less in private assets than a lot o…

AI assessment note: “liquidity management for a foundation is a really different exercise.”

Q When you focus on investing with great people, having great long-term partnerships, what are the characteristics of those people that fit into the managers you'd like to partner with for the long term?

A I sometimes think of manager selection as the three-legged stool, where if you don't have any one of the three legs, it falls down. And those legs are people strategy and structure. On the people side, I really like finding people who have almost an unhealthy obsession with investing, a real passion for it and real hustle around it, but just like they were born to do this. I think there's a lot of people who do investing as a job, but I like partnering with people who really have a passion for it, and I look for people who are really able to generate investment insights to collect different or better information than others, and then sometimes they have the same information as everyone else, but they just put the pieces of the puzzle together in a different way. They understand what matters. The best investors can do both of those things, actually. And then I think people who are intellectually curious and lifelong learners who have a lot of intellectual honesty and try to learn from their mistakes, and then just integrity and transparency.

AI assessment note: “On the people side, I really like finding people who have almost an unhealthy obsession”

Q So you were at Packard for a while before you took over for John as a CIO. What's changed in stepping into the CIO seat from being a senior person on the investment team?

A I think very little changed when I stepped into the CIO role after John retired. And partly that's because our whole team were so cohesive and aligned in building out this portfolio. It was really a team effort. Felt like my baby as much as anyone else's baby. And I think we really had similar investment philosophy and approach, so that helped me make the transition smooth. On the margin, there were things that I changed. I do think in the early days, we tried to have a hundred percent generalist model. And philosophically, I love that. I think working on different things makes you a better investor. I think being generalist is more fun. And I also think and sense competition for capital in the portfolio that you really want. So philosophically, that was great. Operationally, that was hard to do, especially as the portfolio got more complex and more mature. So today we try to have something that's a little bit more of a hybrid and maintain the philosophy of generalism with having some areas of specialization in the portfolio. But for example, there may be a smaller group that works on a particular investment going deep But there is constant interaction with the rest of the team in terms of updates. Here's what we're learning. Here's what we're finding. What do you guys think about this? Do you know anyone we should talk to? Such that everyone really does have a sense for everyt…

AI assessment note: “I think very little changed when I stepped into the CIO role after John retired.”

Q What's an example of what that research process Fully Baked looks like?

A I'm thinking of some managers we've added to the portfolio recently on the private side where we would have 10 pretty in-depth meetings with the manager, with their team, doing case studies. We have done 25, 30 references on investments recently in the past. We really value the reference calls. We learn so much from them. It's not about finding the gotcha. It's about Huh. There's an interesting comment about this investor that presents an angle that I didn't see before, and maybe it leads to some follow up questions and references are really important part of our process. We do try to not do those until we're really excited about it so that we're not wasting people's time and our own.

AI assessment note: “10 pretty in-depth meetings with the manager, with their team, doing case studies.”

Q In the last couple of years, there have been all of these other factors, thinking ESG and D&I, that have impacted the way people thought about their portfolios. How have you thought about that and had it impact the portfolio of Packard?

A We actually have a carve out of our endowment that's a mission investment portfolio. That's a three percent carve out. That portfolio has a really different set of goals and objectives that align really closely with the foundation's grant making areas. It's also a different team. I think they have a different set of skills than just pure talent scouting. I mean, the results that they're wanting from those investments are very specifically tied to the grant making areas. So that's one way. On ESG, it's always been something very top of mind for us. I think it didn't have an official name for many years, and now it's becoming much more standardized. But it's always something that's been important to us, and I would say to our managers, to make sure that we are acting in accordance with the foundation's values and taking our responsibility as providers of capital seriously, looking at the effects of our actions and our decisions. So that's not new. It's becoming much more formalized now. So you go to AGMs and managers will have a slide on their ESG initiatives, and they may have a written policy. So it's all becoming a lot more formalized and on paper. We have always had a socially responsible investment policy. It's evolved a little bit over time, not a lot, but it guides us. But the main principle is making sure when we do our reference calling on managers that we are not backin…

AI assessment note: “We actually have a carve out of our endowment that's a mission investment portfolio.”

Q What do you think were your biggest takeaways from the experience working there those three years?

A Yeah. So there are a lot, there are some that are very specific to David and then others that are more about Yale and the model there. David really taught me that investing is a business about people and relationships. I know there's a quantitative aspect to it and you do a lot of modeling, but you can have the best models in the world. And if you're not partnered with the most talented investors on earth, you're leaving a lot on the table. And so he really viewed his partners from a human perspective. He really tried to develop and maintain great long-term relationships with them. I saw him really tell them what he thought. If he had concerns, he would voice them. I think he did this out of respect for them. I've always tried to mimic that. Just if ever I have to part ways with a partner and I don't want the reasons to be a surprise. They may or may not agree with me, but it's probably better for them to have information about how peas are thinking and what their concerns are over time, and hopefully that's helpful to them. The other was how much he spent time mentoring and training young people. I don't know that a lot of people know that about him, but he really just tried to give back, pay it forward. That's something that I've always tried to do as well. The third thing I'd point to is just, he's a very values driven person. I think working for a mission driven organizatio…

AI assessment note: “David really taught me that investing is a business about people and relationships.”

Q How do you structure the research process from very brand new idea to something that gets into the portfolio?

A So anyone can bring an idea in to take a look at. There's no hierarchy around that. Ideas can come from anywhere. If it's something that feels like it could be interesting, we immediately bring a small team to work on it. And those are people with some expertise in that area, but we also often bring in someone with no expertise just to get a different perspective. The small team is constantly interacting with the larger team along the way to give updates, to get questions answered. To get feedback and say in terms of our process, it is very much rooted in another thing that I think Yale did very well, which is deep due diligence. I've had people tell me that it's overkill. Like we do a lot of reference calls. We do a lot of case studies, but the idea is to get to that moment where you sign the limited partnership agreement and have a really high conviction that this is something that has staying power in your portfolio.

AI assessment note: “anyone can bring an idea in... we immediately bring a small team”

Q When you gather your interns together at the end of the summer, and you describe why you think you have the best job in the world, what is it that you tell them?

A A big piece of it is the mission. To be able to go to work every day and work for a mission-driven organization, whether it's an endowment or a foundation, I think is a real privilege, and there's meaning in that, and it's motivating, and every time I get on a red eye or I'm working late, I think about that. The breadth of investments that we work on is so interesting. There is never a dull moment. It's constantly changing. The things that I thought about 10, 15 years ago were not the things that matter today. Today, I'm thinking about the energy transition and AI and cryptocurrency, any number of things. 1015 years ago, there was a different set of topics, so it's this constant learning as an institutional investor because the world is your oyster. What do I do every day, Ted? I build relationships and have conversations with the most talented investors all over the world. Yes, please. Sign me up.

AI assessment note: “A big piece of it is the mission.”

Q How do you balance the top down? You could look at China and what's happened over the last year and a half with the bottom up security selection skill in your selection of the managers in those regions.

A Yeah, well, we definitely have to be investing in regions that we believe in for the long term. So if you're going to be an EM, you have to get comfortable with what's going on there. We can talk about both China and India individually there. We've always been pretty big in India. I think more than a lot of our peers, we really believe in the long-term opportunity there. And we're very comfortable from a top-down perspective investing there. When you look at Some of the demographic trends, just the size of the market, the TAMs for some of these companies, the fact that you have had such a build out of infrastructure, both physical and digital in the country in recent years. There's a lot of things going in India's favor. There are challenges too. Of course, there's often government missteps and you feel like, oh, they've messed it up again. There's corruption. There's a dependence on the global economy, on energy prices, for example, and long term, there's a real issue of climate change. Like, India is very, very susceptible to global temperatures rising, and that's a big long term issue for the country. So there's definitely challenges as well, but I think when you take the long and short of it, we're really positive on India, and if we can find Local partners who we really trust to buy great companies. We're excited to do that.

AI assessment note: “We can talk about both China and India individually there. We've always been pretty big”

Q As you've talked to other people who have farm team programs, what are some of the rules you're considering putting in place for how many get in and how you decide when they're going to graduate?

A My hypothesis is that the easy thing is finding the talent that you want to put in, and the hard thing is developing a framework around when is up or out, under what criteria. Maybe these are people that just don't have a long track record yet, but really show a lot of promise, or you can't get the references you need to really get comfortable and make it a core position. So there's some issues, but I think it's important to have a sense going in for what you want to see Over the passage of time that's going to make this turn into a core position to really believe that every farm team position could become a core.

AI assessment note: “the hard thing is developing a framework around when is up or out”